Here is the full report
Yara International ASA (YAR-OL 284.60kr)
Ben Isaacson, MBA, CFA - (416) 945-5310
(Scotia Capital Inc. - Canada)
Five Reasons We Think Yara Could Buy Allana Potash
Event
We discuss five brief reasons why we think Yara could consider acquiring Allana Potash.
Inc. (AAA:T; not covered).
Implications
Yara is short up to 2.5M mt of potash annually.
Yara + Allana effectively share the same property.
Yara continues to show appetite for potash in Ethiopia.
Yara has capital to spend, while Allana needs a financial partner.
Yara has a solid distribution network already established in India.
Recommendation
We don't cover the stock, have completed limited due diligence, and are therefore unable to give a formal opinion on Allana. However, we have tested Allana's Feasibility Study assumptions and agree with its NPV math of $1.3B, or over $4.25/sh of long-term value.
The more time we spend assessing Allana's project, including the real vs. perceived geopolitical risk of investing in Ethiopia, as well as on Yara's potash needs, the more it seems to us that Yara ultimately operates what Allana has successfully developed to date. We are unaware as to whether Yara has ever spoken with Allana.
Five Brief Reasons We Think Yara Could Buy Allana Potash
Yara is short up to 2.5M mt of potash annually.
In fact, we believe this number could grow to 3M mt over time, as
Yara continues to focus its investment capital on NPK
blends. Yara made a partial hedge to its potash deficit by
taking a $40M position in IC Potash for a 30% off-take in
ICP’s SOP project, not for traditional potash (MOP) that
Yara requires. Allana intends to produce 1M mt, with a
potential increase to 2M+ mt once rail capacity is in place.
Yara + Allana effectively share the same property.
Exhibit 1 shows that Yara’s existing three potash properities
are either 100% within, or 75% surrounded by, Allana
Potash land. Note that Allana consolidated the Nova assets
in September 2012. In fact, if Yara plans to bring
infrastructure to its two concessions within Allana’s
property (especially water), some type of agreement or
partnership will likely be required.
Yara continues to show appetite for potash in Ethiopia.
Despite global potash demand turbulence, especially from
India, Yara increased its ownership interest in the project to
51% from less than 17% in April 2012. Sainik Potash, a
subsidiary of India’s Sainik Coal, is Yara’s minority partner.
Yara has capital to spend, while Allana needs a financial
partner. We don’t cover Allana, but we understand from
management that Allana has soft debt financing
commitments of $600M to $800M. Based on capex of
$795M, the equity component required to fund Allana’s
project could be in the $300M area. Yara’s Belle Plaine
nitrogen expansion in Canada is going to require $2B, and
its recent Bunge acquisition was $750M – so you can see
that a portion of the $300M of equity is more than “a drop in
the bucket” for Yara, but should not be a game changer.
$300M is about 10% of Yara’s annual EBITDA.
Yara has a solid distribution network already established
in India. In addition to Yara’s relationship with Saintik,
Yara distributes more complex NPK fertilizer to India than
any other producer. So, the disbtribution channels already
exist for a combined project – especially considering that the
final product is likely going to the same place. Also on the
table are economies of scale in mine-to-port transportation,
as well as in other logistics.
So what could Yara pay for Allana? We don’t cover the
stock, have completed limited due diligence, and are
therefore unable to give a formal opinion. However, we have
tested Allana’s Feasibility Study assumptions and agree with
its NPV math of $1.3B, or over $4.25/sh of long-term value.
Bottom line. The more time we spend assessing Allana’s
project, including the real vs. perceived geopolitical risk of
investing in Ethiopia, as well as on Yara’s potash needs, the
more it seems to us that Yara ultimately operates what
Allana has successfully developed to date. We are unaware
as to whether Yara has ever spoken with Allana.
